Question

Write a one page explaining how running out of inventory supplies at Starbucks can adversely affect the balance sheet.

Answer 1

Answer: Adverse Effects on Balance Sheet, if one is running out of Inventory supplies: (In this case Starbucks)

In any business (usually which deal with goods), need proper management of Inventory for the sake of meeting the demand of the customers and satisfying their requirements in general. This can be achieved by understanding certain factors of a business such as Geographical locations, time of the year, trend, competitors, market share, etc., based on which a statistical projection would be made for estimating the certainty of demand in the future and thus further plan their requirements accordingly. If in any case, such an estimate might result in variance, then in such scenarios a business would face a probable impact on its financial viability. The following are the instances where a business (Starbucks) would face adverse effects on its balance sheet.

1. Due to non-availability of inventory, it might impact the business of Starbucks as it may not be able to meet the demand of its customers, resulting in the reduction of turn over.
2. Due to the decrease in turnover, Starbucks would face difficulties in meeting its debt obligations hence would result in additional costs as it might initiate clauses like Delay payment charges, Liquidated damages, Interest, etc.,
3. Due to difficulties in meeting its debt obligations, Starbucks' Credit rating would fall which would give an additional impact on its cost in the future in terms of additional interest rates as Banks and Financial institutions lend money on the basis of a company's creditworthiness, as there is an element of risk involved.
4. Due to such an event, the credit period given to the company by its suppliers would reduce resulting in an impact on Working Capital.
5. Other effects include a. Decrease in Cash and Cash Equivalents, reduced profits, decrease in the amount of dividends, etc.